The Difficulties of Selling Short

Selling short – called evil by some (the ignorant), stupid by others (perma-bulls), and a waste of time by yet others (actually some very thoughtful people).

The “Evil” and “Stupid” characterizations I pay no heed to. As a student of markets I am quite intrigued about “taking the other side” and have tested strategies to sell short. The one argument that I do respect – that it being a waste of time – I can appreciate because it is harder with the market’s natural upward bias. And even day to day, without news, the market will drift up oftentimes. Also, because losses on the short side are technically unlimited (you can only lose 100% on the long side basically), one has to take a bit of a trading approach – in others, if you’re a buy and hold investor on the long side and don’t pay much attention to charts, you would still be wise to take a different approach – a trader’s approach to the short side to control risks.

Some of the more well-known stock investors, including William O’Neill of Investors Business Daily fame, have said that even they have a difficult time short selling, and that (I paraphrase here) ┬áhe only made money on the short side in ‘2 of the last 9 corrections’ so he’d rather spend his time researching good long ideas. Short positions have to be watched more closely meaning more time out of your day babysitting positions that won’t likely have the payoff of a good long position. And O’Neill isn’t the only seasoned market veteran saying such things.

But with all of that said, the most difficult part is the emotional part. Knowing how eager everyone is to buy, knowing, especially at times like this with central bank stimulus, that companies really have to mess up to see their prices drop for very long (as mistakes are forgiven in a stimulus market), it is very difficult to be short. The thoughts of wasting time and money when the markets seem unbreakable is draining. Even when signals of a market turn show up, and it looks like things are heading down, the market will often offer one more gasp up just to make the shorts cover. The persistence and emotional cool-ness required are immense.

If you feel overwhelmed by shorting, then skip it! If you want to be a long only investor, and just wait out corrections in cash, then just do it. You don’t have to be always involved.

At this moment, I am testing whether I want to utilize short selling in the future (I am contemplating a small private investment fund). I won’t tell you all which way I am leaning, mainly because I am not leaning anyway yet. But I will admit to the emotional challenges and dedication it takes to place oneself correctly in a short.

If you like, share your stories as I’d be happy to hear what you’re doing and how you’re dealing with it, especially if you are shorting.

Thanks for reading!

PS I am not recommending you short – I don’t know you – but I would like to convey an appreciation for the difficulties of shorting. And that traders who short help make a market, are not evil and often lose at their attempts to short. Typically only morons (like Congressmen) think shorting is evil or morally “wrong,” and as we all know, we should get our moral lessons from our congressmen:)

here’s a story about some of that from WSJ: Congress Bets on Fall in Stocks